When people are buying a home, they can become focused on factors such as whether or not the washer and dryer come with the house, or on negotiating a particular closing date. Over time, such concerns are shown to be rather unimportant. In the long term, there are the 5 big financial traps that await the unwary purchaser. Avoiding these traps can save large sums of money over the term of a mortgage. Let's dive in!
1. Not Shopping Around for the Best Mortgage
This is one of the primary financial traps that people fall into. An appealing interest rate shown in an ad must be backed up by written information about all aspects of the loan. Talk to several lenders and then compare their offers before making a decision.
2. Not Looking at Anything Except the Interest Rate
Mortgages are complicated. First-time home buyers can understandably feel overwhelmed when they see the tall stack of documents needing their signatures at the closing. However, it’s important to understand the differences between mortgages.
Some of the questions to ask a mortgage lender could include: Is there a prepayment penalty? If so, what is the fee that would be charged? The average home buyer doesn’t remain in a home long enough to pay off even a 15-year mortgage (13 years is the average time in a home).
Ask about all points and fees included with the mortgage process and get it in writing. If any additional fees appear at the closing, question them.
The annual percentage rate (APR) combines the lender’s fees with the interest of the loan. Use the APR as one of the comparison factors when evaluating potential mortgages.
3. Not Fully Understanding the Difference Between Adjustable-Rate Mortgages (ARMs) and Fixed-Rate Mortgages
Adjustable-rate mortgages have always been appealing because of their lower interest rates. Home buyers should remember that the interest rate will adjust at the end of the three or five-year period. How much the interest rate goes up or down is totally out of the control of the homeowner. While this may not seem like a big issue, the potential exists for a large increase in the monthly mortgage payment. A lost job, health problems and higher overall monthly expenses could make it much more difficult than anticipated to meet that higher payment.
ARMs can and do work well for many buyers; however, if there is any chance that a higher mortgage payment could become a problem, opt for a fixed-rate 15-year mortgage.
4. Not Getting a Home Inspection
Even if a buyer is involved in a bidding war for a home, it’s important that the offer remain conditional upon receiving an acceptable home inspection from a professional home inspector. Not every issue that a home inspector could find would justify canceling the purchase of the home, but it’s important to know up-front what the problems are and how much it would cost to fix them. Some problems found by a home inspector would be very expensive to repair and would definitely make canceling the purchase the best course of action.
5. Not Arranging for Home Insurance in Time
If the buyer shows up at the closing without proof of having obtained satisfactory home insurance, the mortgage lender will not provide the necessary funds at the closing. A very good deal could be lost by this oversight.
Avoiding these financial traps can save thousands over the life of the mortgage. Choosing the best mortgage from a reputable mortgage lender is a serious decision worth taking the time to do thoughtfully and carefully.
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